The Controversy Over Laura Prepon's Return Shows Netflix Is Doing It Right

Netflix doesn't release ratings data for its shows; the company believes the measurement is largely meaningless.

But if there was any doubt that Netflix's bet on original programming hasn't paid off, consider the outrage following reports that actress Laura Prepon, a supporting character in Netflix's Orange is the New Black, may not be returning to the show.

In less than three months, Netflix has created a show with a die-hard cult following; something that has taken other networks years to accomplish.

The success of Orange is the New BlackThe controversy over Prepon's return has been ongoing for several weeks. Last month, BuzzFeed reported that Prepon was only returning for a single episode -- that angered fans online, and was enough to solicit an official response from Netflix management, who denied the report and said the second season's cast has not yet been finalized.

But BuzzFeed isn't backing off. It reiterated that report again on Wednesday, and once more, fans across the Internet are up in arms.

Without knowing the ratings, it's difficult to judge the show's success, but the very fact that such a new show has been able to generate such buzz has to be seen as a positive sign for Netflix.

Historically, great shows take time to developTo be sure, Orange is the New Black is probably much less popular than other premium shows like Game of Thrones and Breaking Bad, but unlike Orange is the New Black, those shows didn't turn into hits overnight.

Game of Thrones has become one of HBO's most popular shows ever, second only to The Sopranos, but it wasn't always that way. The first season of Game of Thrones was only a modest success, and was actually less popular than the first season of Boardwalk Empire.

The same is largely true for AMC's Breaking Bad. The first episode of the second half of the fifth season brought in twice as many viewers as any episode prior to that, and in general, Breaking Bad has steadily expanded its base of viewers over time. But Breaking Bad's creator, Vince Gilligan, remarked that the show might've been cancelled in its second or third season.

Netflix and the serialized TV showBut obviously, Breaking Bad wasn't cancelled -- and Gilligan credits on-demand services like Netflix. AMC sells its content to the Internet video streamer, and the deal appears to have benefited both companies -- Netflix gets a bundle of great content to attract subscribers; AMC sees the popularity of its shows grow over time.

As a highly serialized show, Breaking Bad does not lend itself to casual viewing. You couldn't, for example, just start watching the show in the middle of the third season -- each episode forms part of a very long story arc. Thus, if a viewer hadn't considered watching the show until just recently, they would need the services of a company like Netflix to catch up.

Of course, it works both ways. As Academy Award winning actor Kevin Spacey argued, highly serialized TV shows are the ideal medium for storytelling, trumping two-hour long movies and traditional episodic programs. As video-on-demand services have made watching these type of shows possible, the format has seen an explosion in popularity. Even networks like The History Channel have jumped on the trend.

Virtually all of AMC's recent success has been built on its commitment to that type of programming -- shares of the network are up more than 63% in the last two years, as hits like Mad Men and The Walking Dead have brought in top advertising dollar.

The subscriber dilemmaBut, despite the fact that its bet on original programming appears to have paid off, Netflix remains challenged. The company has committed itself to paying enormous future content costs, off-balance sheet liabilities that total in the billions.

Given that Netflix is only modestly profitable, the company will be forced to raise prices (and hope its members stay) or continue to add new subscribers. Management believes it can accomplish the latter; in fact, CEO Reed Hastings has said he believes Netflix can triple its current subscriber count.

Perhaps it can. But if it did, it would prove to be far more successful than HBO, whose base of domestic subscribers has floated near 30 million for the last several years. Netflix does have one advantage over HBO -- it doesn't require a cable subscription. Anyone with the Internet can get Netflix, but to get HBO, one needs a cable package. Netflix, then, costs just $8 per month -- HBO could cost as much as $100.

HBO has its own online service, HBO Go, that is on par with Netflix. But to use it, you still need cable. There have been reports that HBO was considering offering the service separately, but so far, nothing has come of that -- and it seems unlikely. HBO's parent company, Time Warner , owns several other cable networks, including TBS, TNT, CNN, and Cartoon Network. Offering HBO a-la carte would be a strike against the larger cable complex, of which Time Warner is a major player.

Netflix has successfully made the switchBack in May, I warned that Netflix was taking a gamble, one that could alienate many of its subscribers. By refusing to pay for bulk content in favor of exclusive deals and original programming, Netflix was fundamentally changing the structure of its service.

But the bet appears to have paid off. Admittedly, it's still in the early innings -- Netflix has many more shows planned. But for now, investors have to be happy with the company's recent track record. Orange is the New Black has built up a cult following virtually overnight -- a first for the industry. More generally, the emergence of the serialized TV show (even ones from other networks like AMC) benefits Netflix.

Americans reportedly spend nearly 34 hours a week watching television! With television viewing taking up almost as much time as the average work week, the potential for profits in the space is enormous. The Motley Fool's top experts have created a new free report titled "Will Netflix Own the Future of Television?" The report not only outlines where the future of television is heading, but offers top ideas for how to profit. To get your free report, just click here!